The stock market’s biggest fear these days: Strong economic data

Anthony Saglimbene, global market strategist at Ameriprise Financial, joins this week’s “What Goes Up” podcast to discuss his views on that. Below are lightly edited and condensed highlights of the conversation. Click here to listen to the whole podcast, and subscribe on Apple Podcasts or wherever you listen.

You say that good news is bad news again for the market — can you lay that out for us?
Over the last couple weeks, the markets have really settled into this idea of A, “are we headed for a recession?”, and then B, “is it going to be prompted by the Fed raising interest rates too aggressively?” And so what I mean by a good-news-is-bad-news type of market environment is the hotter that economic news comes in versus expectations kind of implies that maybe the Fed will need to continue to raise interest rates more aggressively. And so you saw a little bit of that in the reaction to the May employment report where we created 390,000 jobs in May, the unemployment rate held steady at 3.6% for the third straight month. By all accounts, the employment backdrop is very strong. And the markets declined because the idea is that as long as the labor market remains strong, as long as economic activity is moving above what I think consensus estimates are, it implies that the Fed may have to raise interest rates more aggressively.

As we move through the next couple weeks and couple months, data that come in hotter than expected, you would expect that the market would greet that more negatively. And then data that come in a little bit weaker, but not too weak, would be greeted positively. We call it this Goldilocks kind of scenario where economic momentum is declining, but not so much that fears of a recession start to set in. It’s a tall order, but that’s where we are in the market environment right now.

If inflation moderates, what does that mean for markets for the second half of the year?
The consumer is in good shape, saving rates are high, debt levels are low. They’re starting to use revolving credit a little bit more, so that’s something that we’re watching. But net-net, consumers are in good shape. And as long as the labor market remains in good shape, then I think you’re seeing a shift in consumer behaviors, not a retrenching in spending. They’re spending less on goods and more on food and energy, maybe a little bit more on services, and as that pandemic wave of travel starts to ebb in the summer, maybe that starts to come down.

So as if inflation pressures can moderate and employers don’t retrench in hiring and consumers don’t retrench in spending, then I do think that the Fed has a pretty narrow path to start maybe slowing the pace of increases. And the opportunities that have been created in the stock market. In my view, the stock market is pricing in we’re gonna see a recession maybe by the end of this year, early next year. If that’s not the case and the Fed can really land this plane and get a softish landing, not a hardish landing, then I think the stock market can recover in the second half of the year.

The one thing we haven’t talked about is earnings. And, and that has us a little bit more concerned because earnings estimates really haven’t been coming down. We’re in for a period where analysts are going to need to adjust their earnings, and I think the market reaction to that could be a little bit more negative.